04 Sep 2014

Will UK Manufacturing Make a Comeback?

Manufacturing in the UK has stalled somewhat in recent years as the country continues to feel the effects of the global economic crisis.

New jobs, export orders and new business all plummeted in the immediate aftermath, much to the dismay of Downing Street, with companies left to pick up the pieces. But is there a change of fortune on the horizon for the global powerhouses?

The Markit/CIPS UK Manufacturing Purchasing Managers’ Index edged down in August to 52.5 from 54.8 in July – its lowest reading for 14 months – yet the sector still grew as a figure of 50 indicates expansion.

A separate survey from the EEF trade body, conducted between 30 July and 20 August, also shows growth has slowed.

Nevertheless, the pace of expansion in UK manufacturing remains slightly above its long-term average.

Manufacturers, meanwhile, are reportedly expecting a positive third quarter, plus their spending is set to increase for a 17th consecutive quarter, suggesting the worst days of the recession are in the past.

EEF expects the manufacturing sector to grow by 3.3% in 2014, down from its previous forecast of 3.5%, but this would still mark the sector’s fastest rate of expansion since 2010 when output grew by 4.2%.

Cause for optimism

Despite all the doom and gloom of slowing orders and falling output, there could be a glimmer of light at the end of the tunnel.

The UK is currently one of the cheapest manufacturing locations in the western world, according to a recent report from Boston Consulting Group (BCG), partly due to stagnant wages offered by employers.

Wage costs, for example, have jumped by 16% nationwide over the course of the past decade. In comparison, however, France’s have increased by 52% at the same time and Italy’s have soared by 62%.

Corporation tax cuts in the UK have contained costs, while the labour market in the country remains more flexible than others. A cost explosion in various emerging markets around the world has also helped.

The productivity-adjusted cost of making manufactured goods in China is $12.47 an hour – up from a mere $4.35 in 2004 – and in Russia it is $21.90, so firms no longer regard the UK as an extortionate destination.

Manufacturing costs in the UK have improved by as much as 10 percentage points compared to other Western European countries, while the trend is so pronounced that the country is even beginning to compete with many Eastern European countries such as Poland and the CzechRepublic.

What does the future hold?

The BCG now classes the UK along with the Netherlands, Indonesia and India as regional rising stars on the world stage.

Only time will tell if the country can capitalise on these changing perceptions. But whatever the case, the future looks rosier than it did previously – and UK manufacturing firms should take heart from this.

It all makes the UK a much more attractive place to set up shop and do business once the investment cycle turns back toward growth.

But even though the country has its own house in order, a question remains about the health of global demand.

Weak manufacturing purchasing managers’ indices in the eurozone and China, could prove detrimental to the UK in the long run, despite the positive state of the sector at the moment.

Manufacturing needs customers with deep pockets in order to thrive, otherwise stock will pile up and production will slow.

It is not clear whether UK manufacturing will fall foul of weak demand around the world, but what is clear is that the industry will need the support of government to remain on the path to strong, sustainable and balanced growth.



 
 

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